A meeting of the Finance-Auditing Committee was held in the Board Room, Administration Building, Toll Plaza, San Francisco, California, on Friday, August 21, 2008, at 10:00 a.m., Chair Stroeh presiding.

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith outlined commitments, disbursements and investments made on behalf of the District. The report also included a copy of the District’s Investment Report from PFM Asset Management LLC (PFM). A copy of the staff report, with attachments, is available in the Office of the District Secretary and on the District’s web site.

At the meeting, Nancy Jones described the latest economic news and current interest rates for the District’s portfolio. Ms. Jones stated that the state of the economy has not changed since June 2008. She stated that housing, employment, consumer confidence and the financial sector remain weak and appear to be worsening, and that inflation is uncomfortably high and also appears to be worsening. She noted that the Federal Reserve Bank is in a quandary about whether to stimulate the economy by lowering interest rates, or to put a ceiling on inflation by raising interest rates. Ms. Jones also stated that the Economic Stimulus Package temporarily increased consumer spending, but has since fallen as consumer confidence reached its lowest point in 16 years.

Ms. Jones stated that in the midst of the current market volatility, the Fixed Income Market has stayed strong, in contrast to the Stock Market. The yields for Two-Year U.S. Treasury Notes have remained steady from June to August 2008, keeping within a range from 2.5% to 3.0%. She explained that the recent media reports regarding the financial troubles of the “Government-Sponsored Enterprises” – the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), do not affect the District’s portfolio, which is invested in the safest, most risk-free investments. She further explained the difference between Fannie Mae and Freddie Mac stocks, which have suffered falling prices, and the bonds issued by these federal agencies, which have remained steady and secure. She noted that the Portfolio Manager will continue to invest in Fannie Mae and Freddie Mac bonds, which are considered to be very good investments. At the present time, only a small portion of the District’s portfolio is invested in these federal agencies, with 12% of the portfolio invested in Fannie Mae bonds, and 4% invested in Freddie Mac bonds. She further noted that despite the turmoil in the economy, the District’s portfolio is earning an average of 4.25%, which is excellent, given the fact that the Federal Funds Rate is currently only 2%.

Discussion ensued, including the following:

Chair Stroeh commented that the District’s Portfolio is in relatively good shape because of strategic long-term investments that were made before the current credit crisis. In response, Ms. Jones confirmed that the returns on investments in the District’s Portfolio will always be more stable than other portfolios, because the bond market is much less volatile than the stock market.

Director Boro requested general information about Fannie Mae and Freddie Mac. In response, Ms. Jones explained that both Fannie Mae and Freddie Mac are Government-Sponsored Enterprises, stockholder-owned corporations authorized to make loans and loan guarantees. Fannie Mae was founded as a government agency in 1938 to provide liquidity to the mortgage market, and in 1968 it was converted into a private corporation in order to remove the activity of Fannie Mae from the federal budget. Freddie Mac was chartered by the U.S. Congress in 1968 to provide competition for Fannie Mae in the secondary mortgage market. Ms. Jones stated that she would provide a comprehensive written report on these two federal agencies in her next report to the Finance-Auditing Committee.

Staff recommended and the Committee concurred by motion made and seconded by Directors EDDIE/COCHRAN to forward the following recommendation to the Board of Directors for its consideration:

RECOMMENDATION

The Finance-Auditing Committee recommends that the Board of Directors authorize the following actions by the Auditor-Controller:

a.

Ratify commitments and/or expenditures for the period July 1, 2008, through July 31, 2008, totaling $100,540.00;

b.

Ratify investments made by the Auditor-Controller during the period July 15, 2008, through August 11, 2008, as follows;

Security

Purchase Date

Maturity Date

Original Cost

Percent Yield

Svenska Handelsbanken Commercial Paper

07/15/08

09/18/08

6,255,495.42

2.61

FNMA Disc Note

07/17/08

08/21/08

3,018,118.13

2.35

FHLB Disc Note

07/21/08

08/21/08

5,474,992.95

2.33

Banque National De Paris Certificate of Deposit

07/30/08

11/03/08

5,000,000.00

2.73

Royal Bank of Scotland (NY) Certificate of Deposit

07/30/08

10/15/08

4,640,065.62

2.74

FFCB Notes (callable)

08/01/08

07/15/13

4,995,000.00

4.77

Citigroup Funding, Inc., Commercial Paper

08/04/08

11/04/08

1,459,481.33

2.82

UBS Finance Delaware Commercial Paper

08/04/08

11/04/08

6,950,000.55

2.82

Societe Generale NA Commercial Paper

08/08/08

11/03/08

7,021,040.25

2.79

c.

Authorize the Auditor-Controller to re-invest, within the established policy of the Board, investments maturing between August 12, 2008, and September 8, 2008, as well as the investment of all other funds not required to cover expenditures that may become available; and,

d.

Accept the Investment Report for July 2008 prepared by PFM.

Action by the Board at its meeting of September 12, 2008 – Resolution
CONSENT CALENDAR

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith reported on staff’s recommendation to authorize miscellaneous budget transfers in the FY 07/08 Operating Budget to complete necessary line item budget transfers for last fiscal year’s budget, and to authorize miscellaneous budget adjustments in the FY 08/09 Operating Budget to add two line items inadvertently omitted from the current fiscal year’s adopted budget.

The report described why the miscellaneous budget transfers and adjustments are necessary, noting that these transfers and adjustments add no net additional expenses to the FY 07/08 Operating Budget, but simply transfer funds to comply with District policies. The report also stated that the adjustments in the FY 08/09 Operating Budget will result in a net increase in revenues of $664,700 and a net increase in expenses of $150,000.

The report also stated that the Ferry Transit Division’s budget for Professional Services expenses needs to increase by $300,000, due to additional consultant expenses associated with Contract No. 2008-FT-2, San Francisco Ferry Terminal Emergency Berth Repairs. The District received reimbursement to repair the damage at the San Francisco Ferry Terminal, and this action will align the repair expense with the insurance reimbursement. In addition, the Bus and Ferry Transit Divisions’ budgets experienced higher than expected labor and workers’ compensation costs, necessitating transfers totaling $700,000 from Legal Expense line items to Salaries and Benefits line items.

The report also noted that a grant-funded joint security exercise in the Ferry Transit Division was not completed in FY 07/08, necessitating an adjustment in the FY 08/09 Operating Budget to account for an increase in Ferry Transit Division revenues and expenses for grant funds in the amount of $150,000. Also, the FY 08/09 Operating Budget line item, Other Operating Income, needs to be increased by $514,700 to account for higher than expected revenue from the Agreement for Marin Local Bus Service between the District and the Marin County Transit District.

The report further stated that staff recommends authorizing the above-described budget transfers and adjustments. A copy of the report is available in Office the District Secretary and on the District’s web site.

Discussion ensued, including the following:

Director Reilly inquired regarding the budget adjustment for Other Operating Revenue. In response, Mr. Wire explained that the Agreement for Marin Local Bus Service requires that the Marin County Transit District contribute $514,700 to the District each fiscal year for capital expenses associated with providing local bus transit service, and that this line item was inadvertently omitted from the FY 08/09 Operating Budget.

Director Grosboll inquired as to why there were no budget adjustments necessary for fuel expenses. In response, Mr. Wire stated that staff was able to increase the budget for fuel expenses in the FY 08/09 Operating Budget sufficiently to account for any fluctuations in fuel costs in the current fiscal year, by transferring unused budgeted expenses from other departments. He noted that the District now spends over $10 million annually in fuel expenses, more than twice as much as seven years ago.

Staff recommended and the Committee concurred by motion made and seconded by Directors EDDIE/COCHRAN to forward the following recommendation to the Board of Directors for its consideration:

RECOMMENDATION

The Finance-Auditing Committee recommends that the Board of Directors authorize the following miscellaneous budget transfers to the FY 07/08 Operating Budget and miscellaneous budget adjustments to the FY 08/09 Operating Budget:

a.

Transfers in the FY 07/08 Operating Budget in the amount of $300,000 to Ferry Professional Services and in the amount of $200,000 to Ferry Workers' Compensation, to be funded by $500,000 from Ferry Insurance;

b.

A transfer in the FY 07/08 Operating Budget in the amount of $300,000 to Ferry Salaries and Benefits from Bridge Legal Expense;

c.

A transfer in the FY 07/08 Operating Budget in the amount of $400,000 to Bus Salaries and Benefits from Bus Legal Expense;

d.

Increases in the FY 08/09 Operating Budget in the amount of $150,000 for Ferry Revenues and in the amount of $150,000 for Ferry Expense; and,

e.

An increase in the FY 08/09 Operating Budget in the amount of $514,700 for Other Operating Income.

Action by the Board at its meeting of August 22, 2008 – Resolution
NON-CONSENT CALENDAR

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith reported on staff’s recommendation to authorize a budget transfer from the FY 07/08 Operating Budget to the FY 07/08 Capital Budget in the amount of $214,900, and authorize a budget increase in the FY 07/08 Capital Budget in the amount of $2,661,500, for Indirect Cost and excess District Project Management costs. The report stated that Resolution No. 2008-060, adopted by the Board of Directors at its June 27, 2008, meeting, must be amended to set budget authority levels to match the level of actual expenses that have already occurred.

The report described the District’s Indirect Cost Allocation Plan (ICAP), noting that the recommendations described above are necessary in order to successfully implement the ICAP program. The report stated that the transfer and increase in budget authority will not increase the overall expenses of the District.

The report provided a list of capital projects, totaling $2,876,400, for which the approved Indirect Cost Rate of 119% has been calculated and recorded. The report noted that the size of the recommended budget authority transfer is limited due to the capability of the financial system to retroactively transfer budget authority, and that all actual expenses have been recorded by the accounting system in the FY 07/08 Capital Budget. A copy of the report is available in Office the District Secretary and on the District’s web site.

At the meeting, Mr. Wire summarized the staff report, noting that the proposed action will allow staff to make logistical changes in the District’s budget to accommodate the new ICAP bookkeeping processes, since the budget is not flexible enough to transfer small dollar amounts between the operating and the capital budgets. He stated that with this change, staff will keep the amount of the Operating Budget unchanged, and increase the Capital Budget as needed in order to implement the ICAP program. He noted that staff has set the appropriate authority levels for ICAP transfers in the FY 08/09 Budget, so that the recommended budget transfers and adjustments will be a one-time-only action.

Discussion ensued, including the following:

Director Eddie commented that implementing the ICAP program is important for the District, because it clearly shows that toll revenue is being spent on vital capital projects.

Staff recommended and the Committee concurred by motion made and seconded by Directors BORO/COCHRAN to forward the following recommendation to the Board of Directors for its consideration:

RECOMMENDATION

The Finance-Auditing Committee recommends that the Board of Directors authorize a budget transfer from the FY 07/08 Operating Budget to the FY 07/08 Capital Budget for budget authority in the amount of $214,900, and authorize a budget increase in the FY 07/08 Capital Budget in the amount of $2,661,500, for recognition of indirect costs under the Indirect Cost Allocation Program; and, amend Resolution No. 2008-060 accordingly.

Action by the Board at its meeting of August 22, 2008 – Resolution
NON-CONSENT CALENDAR

Discussion Regarding Updates to the Five- and Ten-Year Financial Projection

In a memorandum to Committee, Auditor-Controller Joseph Wire presented a report on the District’s financial projection for the ten-year period from FY 09/10 through FY 18/19. The report included the following sections, as well as a detailed narrative on each of these sections: 1) Introduction; 2) Fiscal Strength of the District; 3) Projection Findings; 4) Assumptions; and, 5) Next Steps; as well as the following Appendices: Appendix A, Projection; Appendix B, Assumptions; Appendix C, Ten-Year Capital Plan Projection; Appendix D, Capital Contribution Calculation; and, Appendix E, Reserve Structure.

The report contained a five- and ten-year financial projection of operating and capital project revenues and costs to the District. The projection reflects the maintenance of all current policy decisions, including the current operating service levels, the current capital project schedule and the current revenue assumptions over the period of the projection. Future policy decisions to change tolls, fares and/or service levels are not included in this projection. The report noted that a long-term projection allows for early planning and execution of funding strategies for large capital projects, as well as enables the public to understand the challenges the District faces in the years to come.

The report stated that the fiscal strength of the District is best tracked by comparing the level of reserve funds available for operating and capital needs, with the time period necessary for the projected needs of the District to exhaust those resources. Historically, the District has maintained reserve funds for capital projects and operating expense emergencies. The FY 08/09 Operating and Capital Budget is expected to keep the reserves constant throughout the year, but given the projected funding needs for next year’s FY 09/10 Operating and Capital Budget, it is anticipated that all available reserves will be allocated in FY10/11. The report noted that additional funding for new capital projects in future years beyond FY10/11 will need to be raised to fund the full ten-year capital plan included with the projection. The report also stated that in keeping with District policy, the District will have fully funded reserves to cover all its legal liabilities and commercial paper obligations. A full description of how the reserves will be managed is outlined in Appendices D and E.

The report further stated that the projected ten-year deficit of $163 million is approximately $127 million lower than last year’s $290 million estimate. The projected five-year deficit is $30 million, $61 million less than last year’s $91 million estimate (the five-year deficit reported in 2007 was adjusted from $81 million to $91 million to account for an increase in Other Post-Employment Benefits expenses based on a new actuarial study). The report also outlined the reasons for the five-year remaining deficit, as follows: (1) adding a new fifth year, 2014, accounts for $24 million of the deficit; (2) the change in Cost-of-Living Allowance used to inflate expenses in the projection, which accounts for $5 million of the deficit; and, (3) unanticipated changes in expenses, primarily consisting of increases in fuel, salaries and medical expenses, which accounts for $21 million of the deficit, offset by approximately $20 million in transfers of expenses to capital projects.

The report also contained a description of operating revenue and expense assumptions that were used to prepare the financial projections, which are listed in detail in Appendix B.

The report also described the capital program assumptions. The FY 09/10 through FY 18/19 Ten-Year Capital Projection, provided in Appendix C of the staff report, which identified $1.3 billion in capital needs over the next ten years, requiring a District contribution of $316 million. This plan has been structured to systematically maintain and sustain existing Bridge, Bus and Ferry capital investments within existing staff resources. Grants are generally assumed to fund 80% of capital projects, including capital Bridge paint and rehabilitation projects, consistent with prior experience. The 80% grant funding assumption will be reviewed each year to reflect current experience. All projects have been reviewed and rated essential for the continued operation of the District, and the timing of each project balances the operational need for the project with the availability of staff resources to complete the project in a timely fashion. Project costs are inflated by 2.7% in the out-years based on the inflation factor used by the California Transportation Commission for the State Transportation Improvement Program. The report also included alternative capital revenue assumption scenarios, showing how the projected five-year deficit would increase with a 50% grant funded assumption and with a 30% grant funded assumption.

The report further stated that the District will continue the process of addressing the projected deficit through its Strategic Planning process, which will include education on the potential paths to balance the District’s long-term financial plan, as well as the merits of the various options, with the goal to produce a revised Strategic Plan for Achieving Long-Term Financial Stability for consideration by the Board. Staff plans to implement the plan in the years ahead, including incorporating it into the current FY 08/09 Operating and Capital Budget, where appropriate. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

At the meeting, a lengthy discussion ensued regarding the status of the District’s reserves. At the request of several Directors, Joseph Wire stated that staff would prepare a comprehensive report on the District’s reserve structure for the Board of Directors at a future meeting, which report would include several possible scenarios for funding the remaining phase of the Seismic Retrofit project.

Discussion ensued, including the following:

Director Boro made the following comments and inquiries:

He inquired as to whether the recently adopted $1 toll increase would provide additional funds to begin to pay off the District’s Commercial Paper debt. In response, Mr. Wire explained that by District policy set by the Board of Directors in 2001, the District will begin to make payments on the principal portion of Commercial Paper debt after completion of the Golden Gate Bridge Seismic Retrofit project. Celia Kupersmith added that since construction on the final phases of the Seismic Retrofit project, Phase IIIA and IIIB, has not yet begun, it could be another six years before the repayment plan starts.

He inquired as to whether there will be any money left in the reserves after completion of the Seismic Retrofit project to complete any future discretionary capital projects. In response, Mr. Wire stated that at the current projected cost of the project, there would be approximately $35 million left in reserves. He also stated that the Board can increase the amount of the annual capital contribution from the operating budget in order to build additional reserves for future capital projects.

He commented that the District has a structural deficit in its budget, and that it will be incumbent upon the District to seek out additional federal grant funds to fully fund important capital projects, such as the Seismic Retrofit project and the Main Cable Restoration project.

He commented that the District needs to fully consider the ramifications of potential District contributions to the Doyle Drive project, given the fact that the District reserves will be fully encumbered by FY 10/11.

Director Reilly inquired as to why the five-year projection shows a $30 million deficit. In response, Mr. Wire explained that the deficit grows each time a new year is added to the projection. He further stated that to put it into perspective, in the first year of the projection, FY 09/10, the deficit will be zero, and that the $30 million five-year deficit is the smallest it has been in years.

Director Grosboll inquired regarding the $61 million Commercial Paper debt. In response, Mr. Wire explained that the $61 million is shown on the District’s balance sheet as a debt liability. He noted that because there are no plans to begin paying off the debt immediately, the debt liability is not offset dollar-for-dollar out of the reserves. He added that Standard and Poor recently renewed the District’s rating of AA-, the highest rating given to a single-entity agency such as the District.

Director Pahre inquired as to whether staff has ever considered paring down all capital projects by 10% as a method of reducing the District’s capital project funding needs. In response, Ms. Kupersmith stated that in the past three years, construction costs have skyrocketed, which in turn increases the costs of important District capital projects. She noted that in the past several years, the District has been able to complete only 35% of the projects in the Ten-Year Capital Plan, and that staff is diligently working to improve the process of realistically planning capital projects.

Director Newhouse Segal requested a report comparing the amount of reserves of other public agencies comparable to the District, and Mr. Wire stated that staff would produce such a report for the Board of Directors.

Director Eddie commented that the District is in the midst of the biggest building boom in its history, with vital projects such as the Seismic Retrofit project and the upcoming Main Cable Restoration project. He noted that due to the age of the 70-year-old Golden Gate Bridge structure and the age of the rest of the District’s facilities, most of the capital projects are rehabilitation or repair projects rather than new construction.

Action by the Board – None Required

5.

Review of Golden Gate Bridge Traffic/Tolls and Bus and Ferry Transit Patronage/Fares for One Month Ending July 31, 2008

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a schedule comparing categories of Bridge traffic, as well as a monthly review of Bridge traffic and tolls and transit patronage and fares, for one month ending July 31, 2008. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

Action by the Board – None Required

6.

Review of Financial Statements for Twelve Months Ending June 30, 2008

a.

Statement of Capital Programs and Expenditures

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a financial statement entitled, Statement of Capital Programs and Expenditures for Twelve Months Ending June 30, 2008. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

Action by the Board – None Required

7.

Review of Financial Statements for One Month Ending July 31, 2008

a.

Statement of Revenue and Expenses

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a financial statement entitled, Statement of Revenues and Expenses for One Month Ending July 31, 2008. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

Action by the Board – None Required

b.

Statement of Capital Programs and Expenditures

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a financial statement entitled, Statement of Capital Programs and Expenditures for One Month Ending July 31, 2008. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

In a memorandum to Committee, Auditor-Controller Joseph Wire and General Manager Celia Kupersmith provided a report summarizing budget adjustments and budget transfers authorized by the Board of Directors during the three-month period from April 1, 2008, through June 30, 2008. A copy of the report, including attached charts outlining applicable budget adjustments and transfers, is available in the Office of the District Secretary.

Action by the Board – None Required

9.

Public Comment

There was no public comment.

10.

Adjournment

All business having been concluded, the meeting was adjourned at 11:05 a.m.